Insight: Banks bristle at breakup call from Sandy Weill

July 26, 2012|Reuters

Executives and bankers are stumped by certain questions in such a breakup analysis. For instance, how would a standalone investment bank or its clients be in a better position without access to funding that comes from being part of a diversified company? And what about the costs of untangling integrated systems, some of which were only melded together at a great expense in the past few years?

One former top banking executive, who declined to be named, said "unscrambling the egg" is one of the main difficulties in a breakup scenario - especially when functions like lending to large companies, treasury management and underwriting debt are all interlinked.

SHRINKING BANKS

Richard Kovacevich, who retired as CEO of Wells Fargo at the end of 2009, told Reuters that he also did not agree with Weill's recommendation, made on Wednesday in a CNBC interview.

"There is this conventional wisdom that big is bad or risky," he said. "I don't think there is any evidence that that is the case. Banks fail mainly because of concentration of risk."

The idea advocated by Weill and other "too big to fail" critics would imply a return to a Depression-era rules known as Glass-Steagall, which separated investment banks from banks that took deposits and made traditional loans.

Peter Hagan, a director of Allied Irish Banks and former chairman of Merrill Lynch's U.S. banks, said the ability to trade securities helps a bank manage its own risk and provide risk management services to clients.

Instead of returning to Glass-Steagall, regulators could build in incentives for the industry to deconsolidate on its own and reduce risk. One idea could be to create incentives such as more attractive capital rules for smaller institutions, which could make them more profitable and encourage managements of large banks to break into smaller pieces, he said.

"The point is if you get them down to a reasonable size, where they are not too big to fail, you then have the ability to manage the situation if one of them gets somewhat out of line," Hagan said.

NO VOLUNTEERS

Some banks have been getting smaller. Citigroup, for example, has sold more than 60 businesses and $600 billion in assets since determining in 2009 that about 40 percent of its balance sheet was no longer necessary for its banking operation.

Many bankers say what is most likely to happen is that big banks will continue to shed some parts of their businesses and strengthen their balance sheets -- but that there is no 'big bang' series of break ups.

"We need a good discussion about how these institutions might be simplified and much better regulated," said Bill Isaac, former chairman of the Federal Deposit Insurance Corp, who is now global head of financial institutions at FTI Consulting and sits on the board of Fifth Third Bancorp. Isaac does not advocate a return to Glass-Steagall.

With clamor growing for a solution in the United States, some believe regulators may find a way to enforce even stricter rules.

"It's possible that the government would impose a Glass-Steagall type structure, especially if there's another blowup," said one Wall Street source.